A while ago, one investor I consulted brought an Excel sheet for calculating rental income but completely omitted property taxes and insurance. They were roughly estimating the cap rate based only on total returns, but when actual figures were input, the picture changed significantly. In areas like Denver, where insurance costs have risen sharply in recent years, leaving out this item can lead to considerable errors.

According to Zillow's 2026 data, the average home value in Denver is $533,060, and the average rent at that time is $1,996 per month. Dividing these two numbers gives an annualized total return of about 4.5 percent. While this may seem like a decent figure, it's important to note that total return does not reflect any costs.

To see actual profitability, you need to calculate the cap rate based on net operating income (NOI). NOI is the total rental income minus operating expenses such as property taxes, insurance, management fees, maintenance costs, and vacancy losses, and it does not include mortgage principal and interest. Colorado's average effective property tax rate, according to SmartAsset, is 0.49 percent, which is lower than the national average, which is advantageous. However, it's premature to feel secure based solely on this low property tax. Applying the widely used 50% rule in the industry, total operating expenses, including property taxes and insurance, often amount to around half of total rental income, and in areas like Denver, where hail and heavy snowfall lead to high insurance loss ratios, this percentage can be higher than average.

Calculating the Denver case with this standard, the annual rental income is $23,952, and applying the 50% rule, the NOI is about $11,976. The cap rate, when divided by the purchase price, is around 2.2 percent. While the low property tax is beneficial, the high purchase price means that the cap rate does not improve significantly, which is a characteristic of the Denver market.

Adding leverage changes the picture once again. Assuming a 30-year fixed mortgage average interest rate of 6.67 percent as of August 13, 2026, from Freddie Mac, and putting in a 20 percent down payment, the annual principal and interest payment exceeds $32,000. The previously calculated NOI is insufficient to cover this payment. While the cap rate is positive, the cash-on-cash return could turn negative. This is why relying solely on the favorable property tax rate can lead to surprises in actual cash flow.

Of course, just because cash-on-cash is currently negative does not mean the investment lacks value. The loan principal decreases slightly each month, building equity, and Denver is a region with steady employment in tech and healthcare, so long-term appreciation potential should also be considered. However, these long-term factors are not guaranteed returns, and they differ in nature from the numbers that can be verified immediately, like cap rates or cash-on-cash returns.

Applying the 1% rule makes this difference even clearer. The industry rule of thumb suggests that if the monthly rent exceeds 1 percent of the purchase price, cash flow is likely to be healthy. In Denver, dividing the monthly rent of $1,996 by the purchase price of $533,060 results in only 0.37 percent. This is well below 1 percent, indicating that cash flow may be tight based on this rule alone. However, it's important to remember that this rule is not an absolute standard but rather a rough guideline.

From a total return perspective, just because cash-on-cash is currently negative does not mean the investment is meaningless. The portion of the principal paid each month remains as an asset, and when combined with appreciation and tax benefits like depreciation, the long-term picture could change. However, since these factors can fluctuate with market conditions, it's necessary to weigh them differently than the immediately verifiable cap rates or cash-on-cash returns.

If you are considering moving to Denver, I hope you won't base your budget solely on the fact that the property tax rate is low. First, check the actual operating costs, including insurance, HOA fees, and management fees, and then compare the cap rate and cash-on-cash returns. If you are a family considering school districts, it's also advisable to check assigned schools using metrics like GreatSchools, separate from rental yield. Specific tax rates and insurance conditions can vary by county and insurer, so please verify directly before making any agreements. This article is not investment advice, and if you are about to make a specific purchase, I recommend reviewing the numbers again with an accountant or real estate professional.